Conflicts of objectives

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Conflicts of objectives

Conflicts of policy objectives occur when, in
attempting to achieve one objective, another objective is sacrificed.
There are numerous potential policy conflicts, including:

Full employment vs low inflation

The conflict between
employment and
prices is the
most widely studied in economics. If policy makers attempt to undertake
job creation by injecting demand into the economy, by expansionary
fiscal or
monetary policy, there is a danger that prices will be driven
up. This conflict is best explained by reference to the
Phillips Curve.
It is likely that the trade-off still exists, despite the UK economy
approaching full employment and prices still remaining stable in recent
years.

Economic growth vs a balance of payments

As an economy grows,
import spending is stimulated relative to export revenue. Policy makers
have to be aware that a ‘dash for growth’ could lead to
balance of
payments problems.

Economic growth vs negative externalities

Sustainable growth is defined in terms of
the extent to which current economic growth rates do not cause
unnecessary damage to the environment, especially in the future. Economic growth
does, of course, generate both consumption and
production externalities,
such as rising
carbon emissions and global warming, excessive waste, and the
depletion of global
fish stocks.

Flexibility vs equity

In attempting to achieve a flexible economy, which is
one that copes with globalisation, the distribution of income may
widen. For example, a flexible economy can be partly achieved by having
a flexible labour market, but to achieve this there may be an increase
in part-time employment and a reduction in worker protection and job
security.

However, it can also be argued that, in the long
term, a reduction in
unemployment associated with flexibility more
than compensates for a rise in part-time work and job insecurity.

Crowding-out – public sector vs private sector

Crowding-out is another widely studied conflict. The
belief in the existence of crowding-out has profoundly shaped economic
policy over the last 20 years. Crowding-out is essentially a conflict
between the public and
private sector. For example, public sector
borrowing to compensate for market failures and provide public and merit
goods, might drive up long term interest rates and crowd-out private
sector investment. Hence, the desire to achieve short term stability might
put at risk the prospects for long term
growth.

Globalisation and policy conflicts

The rise of
globalisation has
meant that economic shocks from one part of the world can quickly spread
around the global economy. The recent
financial crisis
is a case in point.

The interconnectedness of the global economy creates
problems for domestic policy makers, as the source of inflation or
unemployment may be the global economy, and outside of the control of
domestic governments.

Many argue that automatic
shock absorbers,
including flexible labour markets, progressive taxes and benefits, and a
floating exchange rate, are critical for the success of a country
actively participating in the global economy.